The Expectations Built into GRVY is Dead Wrong

Written by

Jae Jun

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Here is an update on Gravity Co (GRVY), a company that I have held for a couple of years in anticipation of their sequel to their original blockbuster mass multiplayer game Ragnarok Online.

Read the initial post with details of the company and what it does, as well as why the company is one of the best deals under $2.

Here is another blogger’s very detailed summary of GRVY.

2011 Q3 Revenue Summary

  • 1.4% increase in revenue compared to comparable quarter last year
  • Royalty and license fee revenue for 3rd quarter increase 5.6% QoQ due to currency gain against the Yen but still a 1.9% increase YoY due to acquisition of Dragonica which was purchased in Oct 2010.
  • Subscription revenue decreased 5.8% QoQ but increased 37.4% YoY. Decrease was due to the French subsidiary no longer being consolidated as GRVY’s ownership was reduced to 25%.
  • Increase in revenue was due to Korea, US and Canada based on ceasing the subscription based fee model and making it free to play. Also attributed to more updates and more items available in the game.
  • 9% YoY increase in mobile games. GRVY launched a few games for the iPhone which were accepted very well. A potential growth platform in the mobile gaming industry, although the competition is fierce.

The most pleasing point is the fourth one where the new business model of offering the game for free has actually increased revenue. Rather than earning revenue by a few big spenders, this model is now bringing in smaller revenue from a much larger user base. At the same time, existing gamers are the ones that will play the sequel when released, so it is also a smart marketing move.

Expenses Summary

  • Cost has increased by 43% due to acquisitions and the increase in payroll. I’m expecting this to increase as GRVY continues to purchase other gaming titles.
  • R&D spending dropped from Korean Won of 955m to W555m YoY
  • Lower tax expenses from W1,207m to W475m

I’ll need more details on what these reduced expenses are about. My guess is that the acquisitions are favorable for taxes. The increased payroll may also include the R&D figures for the acquired companies such that R&D for GRVY itself can be lowered.

Not enough information to be certain though. The annual report will provide the full details when it comes out next quarter.

Valuation Summary

The stock valuation tools can’t analyze ADR’s well due to currency conversion. You’ll have to enter the values manually into the yellow column to display what you see in the image below.

Below is the asset valuation of GRVY in millions of US$.

Net Net Working Capital (NNWC) for GRVY is $1.50 per share. This is a 10% discount to current market price. Remember that NNWC is the most pessimistic of ALL valuation.

Net Current Asset Value (NCAV) is $1.78 per share. This is a 24% to current market price. NCAV is still much lower than tangible book value.

Tangible book value per share is $1.99.

Stock prices reflect the company’s book value and growth expectations.

Market price = book value + growth expectation

In GRVY’s case, all three asset valuations are higher than market value, thus the market is expecting GRVY be a destroyer of value. Looking at the financial statements and following the company for a couple of years now shows that to be completely false. This visual representation shows what each valuation is made up of based on the market price.

As you can see, the market expects GRVY to create negative returns on capital and assets.

Recent Communication by CEO

A couple of other GRVY investors contacted GRVY to discuss the direction of the company and passed along the comments to me. To sum it up briefly, GRVY is not looking to buy back shares as they believe that it is only a temporary remedy to the lagging stock price. They seek to increase long term shareholder value by diversifying revenue sources and reinvest in the business by developing new games and purchasing publishing rights to other small sized game development companies.

What do you think?

More sources:


Long GRVY at time of writing

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